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How to Stop Parallel Foreign Litigation

For companies in the U.S., contracts with businesses in Central America, the Caribbean or China are both important and potentially risky.

Chief executives spend thousands of dollars in legal fees to ensure they are protected by watertight terms and conditions. In this day and age, where the world is a shrinking place with different cultures, languages, and sources of manufacturing and product supply, doing business outside the U.S. requires a global perspective.

Nailing down the “four corners of the deal” is important. So is inclusion of a legal forum (for foreign litigation or arbitration), governing law and an “attorney fee” clause in your contract. Fast forward. A deal has been inked, money has changed hands and then—unfortunately—problems arise. The product (manufactured in Asia) is late; and when it arrives, it is shall we say, less than stellar and not up to spec. The supplier won’t return your calls, your buyer refuses the consignment, and your bank has already paid over your hard earned funds.

No problem. You have a good contract, a good lawyer and lots of resolve. So you file suit in federal court in your home territory, and serve the supplier with legal process as agreed in the contract. A lawyer (from a firm you have never heard of) appears and files an answer to your complaint. A few phone calls, letters and initial documents are exchanged between the lawyers, as required by the court rules.

Then you hear your supplier has filed suit against your company in, say, Singapore on what seems to be the same contract — despite the forum selection and governing law clauses in your contract. What should you do?

Issue

This scenario is not uncommon and on the increase. The question is, can you prevent the supplier from proceeding with his Singapore action, and avoid “dueling” lawsuits and the expense of unnecessary attorneys fees? The answer will most likely depend in which federal court you filed suit: If you filed in Los Angeles or Houston, you have a reasonable chance of success; however, if you file suit in New York, Chicago or Miami, you could be out of luck.

You should consider filing an “anti-suit injunction” in federal court, asking the court to restrain the defendant (supplier) from going ahead with his separate but parallel action in Singapore.

Left coast, right coast and in-between

U.S. federal courts consider that they have authority over certain persons or entities within their territory (referred to as “in personam” jurisdiction). By extrapolation, they can then direct them by way of an injunction to proceed no further with their foreign litigation, while at the same time not telling that foreign court what to do — a subtle distinction.

Unfortunately, the U.S. Supreme Court has not directly addressed the exact basis under which to grant or deny anti-suit injunctions, and there is a split of authority in the federal courts around the country. Federal courts on the West and Gulf coasts espouse the “liberal” view, while courts on the East Coast espouse the “conservative” view. And one federal court (also on the East Coast) has tried to steer a middle path (but, in this author’s view, simply muddied the waters).

At least the federal courts agree on the “threshold” issue, i.e. the person applying for the injunction must show that both actions involve or relate to the same parties and same legal issues. If not, the applicant will not get out of the starting gate.

On the notion of “international comity,” a key ingredient in an anti-suit analysis, the courts go their separate ways. Unfortunately, comity is an elusive concept best left to the musings of lawyers and judges in their written opinions. In essence, it is the degree of deference that a domestic forum must pay to a foreign government. This boils down to courtesy shown to the foreign government where the parallel action was filed (here, Singapore).

Liberal view

The 5th, 7th and 9th Circuit Courts of Appeal follow the liberal view by placing only minor emphasis on comity, and will usually grant the anti-suit injunction to prevent “duplicative and vexatious” litigation and avoid inconsistent judgments. California federal courts (which fall under the 9th Circuit) are generally willing to grant an anti-suit injunction (based on Seattle Totems Hockey Club v. National Hockey League (1981) (Canada); see also Triton Containers Int. v. Di Gregorio Navegacao (2006) (Brazil) and E.J. Gallo v. Andina Licores (2006) (Ecuador). An applicant must move on one of four grounds: (a) the foreign litigation will frustrate a policy of the forum issuing the injunction; (b) the foreign suit is vexatious or oppressive; (c) the foreign proceedings threaten the court’s in rem or quasi in rem jurisdiction; or (d) the proceedings prejudice other equitable considerations.

Beware: California state courts follow the conservative view, and you should therefore be careful not to file in state court (see TSMC North American v. Semiconductor Manuf. Int’l. Corp. (2008), in which the court refused to grant an anti-suit injunction to prevent litigation in China on same matter).

Conservative view

The 2nd, 3rd, 6th, 11th and District of Columbia Circuit Courts of Appeal follow a conservative view, and will generally deny the application and let the foreign (parallel) action proceed. In other words, these courts give great deference to the foreign forum, and will only grant an anti-suit injunction if the applicant can show (a) the foreign action would prevent U.S. jurisdiction or threaten a vital U.S. policy and (b) domestic interests outweigh concerns of international comity.

For example, a New York federal court (which falls under the 2nd Circuit) will generally refuse to grant an anti-suit injunction (based on China Trade & Development Corp. v. M.V. CHOONG YONG (1987) (Korea), where the court rejected Seattle Totems, and held that the parallel foreign action did not present a threat to its jurisdiction, even though it was “vexatious” and would result in unnecessary expense and a race to judgment).

A Miami federal court would likely take a conservative approach. For example, in Canon Latin America v. Lantech (2007), the 11th Circuit vacated an anti-suit injunction regarding an ongoing lawsuit in Costa Rica. “Canonlat” entered into a contract for distribution of Canon products with Lantech that contained a Florida forum selection and applicable law clause. Lantech filed first in Costa Rica (when Canonlat decided to appoint another distributor) based on an alleged violation of Costa Rica public law for “unlawful termination” by a foreign company. Canonlat then filed in Miami for breach of contract and payments owed, contending the forum selection clause prevented Lantech from suing in Costa Rica. However, the court ruled that — as a threshold matter — Canonlat could not show the two actions were similar (only “somewhat”) because resolution of its breach of contract claim in Miami would not actually dispose of Lantech’s public law violation claim in Costa Rica.

“Mixed” view

The 1st Circuit Court of Appeals has tried to plow middle ground, and an applicant must overcome a “presumption” against issuance of an anti-suit injunction. This requires a showing that under the specific circumstances of the case (including comity interests), equitable considerations favor an injunction. The court can consider (a) whether the two actions are truly “parallel” or whether the foreign action is rather classified as “interdictory;” (b) posture of proceedings in both countries; (c) conduct of the parties (including good faith or lack thereof); (d) importance of policies at stake in litigation; and (e) extent to which foreign action has potential to undermine forum court’s ability to reach a just and speedy result.

In a recent case filled with devious intent Quaak v. KPMG (2004), the federal court in Massachusetts granted an injunction regarding parallel litigation in Belgium. It decided the liberal view undervalued comity concerns, but that the conservative view went too far in the opposite direction. It held that once an applicant was able to overcome the “rebuttable presumption” against issuance of an anti-suit injunction, the court should examine the “totality of the circumstances.” However, at this stage, it is unclear exactly what this means, and it will take a few more lawsuits to flesh it out.

Recommendations

Choose carefully when and where you decide to file suit:

Make sure you file suit in a “friendly” federal court (say, Los Angeles) and win the race to the courthouse. Then, take steps to personally serve your opponent with legal process (summons and complaint) as soon as possible, and get the case going through discovery.

If and when you hear that the supplier has filed suit in Singapore, gather the facts and see if it makes sense to file an anti-suit injunction. If you can show malicious intent or vexatious/devious conduct by the supplier, bring this to the court’s attention. And point out the prejudice that would result if your opponent is not stopped in time.

At the end of the day, your anti-suit injunction should stress that the U.S. has an interest in ensuring a foreigner (the supplier) who does business in or with a U.S. person or entity (your company) should be subject to the U.S. court, particularly since they agreed to be here under a bargained-for contract. By filing the parallel action, the supplier is clearly trying to undermine the integrity of your agreement.

Contrast motions to stay

If you have not yet filed suit in the U.S. by the time your opponent files suit in the foreign court, we have nothing to talk about and an anti-suit injunction will not help you. If your supplier beats you to the courthouse, you would have to file an application in the foreign court to “stay the action” or transfer it to an appropriate U.S. court, based on the forum selection (and governing law) clause in your contract.

A “motion to stay” legal proceedings is different than a pro-active anti-suit injunction, since it is a defensive measure to ensure the dispute is litigated or arbitrated in the correct/agreed forum.

Success under a motion to stay in a foreign court is not always guaranteed. In a recent case in which this firm was involved, a Chinese court in Beijing refused to stay the action and enforce a California forum selection clause in a breach of contract dispute; the issue is on appeal in China, so stay tuned. The outcome will depend on the “totality of the circumstances” and the legal sophistication of the foreign court, so have your U.S. lawyers check with lawyers in that particular jurisdiction.

On the other hand, U.S. courts are far more likely to stay an action filed in the U.S. if the contract has a foreign arbitration or forum selection clause. But this is a subject for discussion on another day.